Growing Rider Use Furthers Flexibility, But Also Complexity
One look at the life insurance product development landscape over the last five years leads to one conclusion: There sure are a lot of new supplemental riders and benefits out there.
As we shall see, they have added a lot of design flexibility, but they also contribute to complexity.
The riders and benefits include not only the old standbys like accidental death benefits (on life and annuity contracts), waiver of premium, and guaranteed insurability options, but also a whole new range of provisions with very focused marketing purposes.
Insurers have many reasons for choosing to provide a given feature in the form of a supplemental rider/benefit, as opposed to interweaving the feature as part of the base contract. Common ones include:
Policyholder Choice: Not all policyholders are interested in the same features or place the same value on a feature. So, when the features are offered as optional riders, policyholders can pick and choose the elements that appeal to them. Some policy initiatives, such as those involving unbundled variable annuities, rely fully on the use of riders and benefits to form a menu of choices.
Filing Strategy: Certain policy features receive tough treatment from state regulators. By using a separate rider to convey such features, insurers can avoid having the approval of other base contract features held up by difficulty related to the rider. Long-term care provisions may be an example of such a feature.
Viability of the Feature: The insurer may believe the relevance of a certain feature could be short-lived (e.g., Triple-X-related riders or estate tax-related riders). Or the insurer may have questions about whether the feature is part of its long-term strategy, due to market appeal, profitability or market conduct issues. When a rider is used to provide for such a feature, it can be easily severed from the base contract for new sales or in-force business.
Today, riders and supplemental benefits are in abundance, as noted earlier.